China c.bank Sept FX purchases down 34 % vs Aug

Tuesday, 18 October 2011 00:00 - - {{hitsCtrl.values.hits}}

BEIJING (Reuters): China’s central bank and other financial institutions spent 247.3 billion yuan ($38.8 billion) buying foreign currencies in September, down 34 percent from August, official data showed.

The purchases, a gauge for the amount of capital flowing into China and contributing to the country’s ballooning foreign exchange reserves, were the lowest in two months.

To prevent the yuan from rising too fast, the central bank buys foreign currencies from commercial banks generated by the country’s trade surplus and foreign investment.

This results in an injection of yuan into the banking system.

The central bank then tries to ring-fence the excess yuan via open-market operations and higher bank reserve requirements to prevent a surfeit of cash from fuelling inflation.

However, foreign currency purchases in September belied a record $61 billion drop in foreign exchange reserves in the third quarter, when an outflow of speculative funds and a skidding euro dented the stockpile.

China has the world’s largest foreign exchange reserves at $3.2 trillion and while they are often seen as a sign of the nation’s growing wealth, critics say they also show how the domestic economy is out of kilter in part due to a suppressed currency.